COMMISSIONER OF INCOME TAX VS SEMEA, KARACHI, 2011 PTD-KARACHI-HIGH-COURT-SINDH 2275 (2011)

2011 P T D 2275

2011 P T D 2275

[Sindh High Court]

Before Muhammad Athar Saeed and Irfan Saadat Khan, JJ

COMMISSIONER OF INCOME TAX

Versus

SEMEA, KARACHI

Income Tax Appeals Nos.256 to 259 of 1999, decided on 21/06/2011.

(a) Income Tax Ordinance (XXXI of 1979)---

----Ss. 16(2), 24(i) & 136(1)---Reference to High Court---Perquisites---Salary---Cash awards paid by assessee to its employees on basis of their individual performance---Order of Assessing Officer treating such awards as perquisites---Order of Appellate Authority treated such awards as part of perquisites for same having been paid to employees not in terms of appointment---Order of Tribunal treating such awards as part of salary and not as perquisites---Validity---Record showed that such awards were paid on basis of individual performance and not in accordance with terms of employment---Term "salary" as defined in S.16 of Income Tax Ordinance, 1979 included a number of payments to be considered as part of salary---Wherever term "include" was used, intention of legislature would be to give same widest possible meaning---Definition of term "salary" was wide enough, thus, such awards, though not included therein, would fall therein---Such awards had been paid as incentive to employees, which was exclusive decision of management, thus, same could not be considered to be perquisite to an employee---Such award would fall under S. 16(2)(a)(ii) as part of salary and not as part of perquisites--- High Court upheld order of Tribunal in circumstances.

(b) Interpretation of statutes---

----Term "include" used in definition clause of a statute---Scope---Intention of legislature by using such term would be to give same a widest possible meaning.

(c) Income Tax Ordinance (XXXI of 1979)---

---S. 23 & Third Sched.---Expenditure incurred on repair, renovation and alteration---Nature---Such expenditure, if not resulted in creation of any capital asset, but appeared to be that of current repair only would usually fall under head of current repair and would be treated as capital expenditure---Principles.

Girdhari Dass and sons v. Commissioner of Income Tax (1976) 105 ITR 339; Commissioner of Income Tax, East Pakistan, Dacca v. Gulistan Cinema Company, Dacca (1968) 17 Taxation 209); I.T.A. No.39/HQB of 1989-90; 1966 PTD (Trib.) 80; Sui Southern Gas Company Ltd. v. Commissioner of Income Tax 2000 PTD 3741 and Commissioner of Income Tax v. Messrs Excide Batteries of Pakistan Ltd. 1978 PTD 191 ref.

Jawwed Farooqui for Appellant.

Iqbal Haider for Respondent.

Date of hearing: 19th May, 2011.

JUDGMENT

IRFAN SAADAT KHAN, J. ---These Income Tax Appeals have been filed against the common order of the Income Tax Appellate Tribunal (ITAT) dated 12-8-1998 in I.T.As. Nos.995/KB and 996/KB of 1995-96 and 1184/KB and 1782/KB of 1997-98 whereby the appeals filed by the respondent were allowed. The following common questions, said to have arisen from the impugned order, have been proposed for the opinion of this Court:

"Whether on the facts and in the circumstances of the case the learned Income Tax Appellate Tribunal was justified in holding that cash awards paid by the assessee to its employees not in accordance with the terms of employment should be treated as part of salary and not as perquisites for the purposes of section 24(i) of the Income Tax Ordinance, 1979?"

"Whether on the facts and in the circumstances of the case the learned Income Tax Appellate Tribunal was justified in holding that entire expenses incurred on repair and renovation are revenue expenditure and not a capital expenditure?"

"Whether on the facts and in the circumstances of the case the learned Income Tax Appellate Tribunal was justified in holding that claim on account of bad debts under section 23(1)(X) is allowable even if no steps have been taken to recover the same?"

2. Briefly stated the facts of the case are that the respondent is a non-resident company which continued to derive income from sales, rent and commission on processing of office equipment mainly computers. The returns for the four years under consideration were filed as follows:--

Assessment year	1993-1994	- 1994-1995	1995-1996	1996-1997
Return filed on	5.8-1993	17.8,1994	5-4-1996	31.12-1996
Income declared	Ra.46950603	Rs.118493002	Rs.225137104	Rs.236614681
Revised Income Declared	Rs.47464892	Rs.118830349

In response to 'the returns filed notices under sections 61 & 62 of the Income Tax Ordinance, 1979 (the repealed Ordinance) were issued and thereafter the assessments in all four years were completed under section 62 of the repealed Ordinance by observing that certain cash awards were given to the employees by the assessee. The Deputy Commissioner of Income Tax (DCIT) thereafter confronted the assessee as to why the said cash awards may not be added to the income as excess cost of perquisite to the employees,. Reply in this regard were furnished that the said amounts were given on the basis of individual performance of the employees and as per the management's decision and cannot be considered either as perquisite or included in the income of the company. Being dissatisfied with the replies furnished by the assessee the DCIT worked out the excess perquisite and thereafter added the same in the income of the company. The DCIT also observed that certain expenditures incurred by the assessee on repairs, and, renovation were capital in nature he, therefore, capitalized the same by adding the same in the income of the assessee, however, the depreciation was allowed on the said amount. The DCIT also noted that substantial amounts have been shown as bad debts written off he, therefore, opined that as no write up and supporting evidences regarding writing off these amounts has been given; he, therefore, added those written off amounts to the income of the assessee in all the four years respectively.

s3. Being aggrieved with the said treatment meted out by the DCIT appeals thereafter were preferred before the Commissioner of Income Tax [CIT(A)]. So far as the issue of excess perquisite is concerned the CIT(A) for the assessment, years 1993-1994 and 1994-1995 dismissed the appeals filed by the assessee vide his consolidated order dated 1-10-1995. Similar treatment was given on the issue by the CIT(A) vide his orders dated 31-5-1997 and 18-2-1998 in respect of the assessment years 1995-1996 and 1996-1997. As far as writing off of bad debts is concerned the CIT(A) dismissed the appeals for the assessment years 1993-1994 and 1994-1995, however, set aside the same for fresh decision in respect of the assessment years 1995-1996 and 1996-1997. As far as the issue of capitalization of repair and maintenance is concerned the appeals of the assessee in respect of all the four years were dismissed by the CIT(A). Still aggrieved with the treatment meted out by the CIT(A) appeals were preferred before the ITAT who vide its consolidated order dated 12-8-1998, in respect of all the appeals filed by the, assessee, allowed the appeals by observing as under:--

"(3) A perusal of the assessment order shows that the Assessing Officer confronted appellant on the point as to why the cash award should not be treated as excess cost of perquisites. It was explained on behalf of appellant that the cash awards were paid to employees on the basis of their individual performance and in the discretion of management. These awards were not paid as per the terms of employment and therefore, cannot be termed as salary. It was further contended that it cannot be treated as perquisites and, therefore, cannot be considered for the purpose of computation of excess perquisites. The Assessing Officer however, treated the cash awards as perquisites and made addition on account of excess perquisites accordingly. The appellant preferred first appeal raising the same pleas: It was submitted before the learned CIT(A) that the cash awards were paid on individual performance over and above their obligation in normal performance of duty and awards were not paid as per terms of employment, therefore, can not be treated as perquisites and cannot be included in the computation of excess perquisites. The learned CIT(A) did not accept the contention and held that since case awards were not in accordance with the terms of appointment, therefore, they were part of perquisites. Being still dissatisfied the appellant has preferred these appeals. The learned counsel for the appellant during the course of arguments before us has conceded that, the cash awards can be treated as salary as defined in section 16(2) (a) (iii) according to which any fees, commissions, allowances, perquisites or profits in lieu of or in addition to, salary or wages is to be treated as part of salary. He has however, submitted that the expression perquisites is also defined in section 16(2)(b) and the case awards given on the basis of extra-ordinary individual performance over and above the normal duty and obligation of an employee can not be included in the expression perquisites. The learned D.R. initially supported the treatment given by the learned two officers below but on reading of the definition of expression perquisites in section 16(2)(b) she had no option but to concede that it does not fall within the definition of perquisites. The impugned findings; of the learned, two 'officers below are, therefore, held to be erroneous and it is directed that the cash awards should be treated as part of salary and not as perquisites for the purpose, of provision contained in section 24(i) of the Income Tax Ordinance, 1979.

(4) The second common objections to the capitalizing of repair and renovation expenses. Mr. Asif Kasbati, learned counsel for the appellant has submitted that this' issue already stands decided in favour of assessee by a Division Bench of this Tribunal in I. T.A. No.39/HQB of 1989-90 (Assessment year 1988-89) vide order dated 17-11-1996. While dealing with similar expenditure it 'has been held that it should be treated as revenue expenditure and the claim should be allowed. Respectfully following the earlier findings of this Tribunal the impugned findings of the learned two officers below on this issue are hereby vacated and the Assessing Officer is directed to allow the expenses as claimed.

(5) The third common objection raised in the assessment years 1993-94 and 1994-95 only is to the confirmation of disallowance of the bad debts. Mr. Asif Kasbati, learned counsel for the appellant has submitted that the appellant is deriving income from sale, rent and commissioning of processing of office equipment mainly computers. He has further submitted that the assessee is mainly dealing with Government departments and due to various reasons and technical4ries some times the government departments are not able to pay a part of the amount-outstanding against them. He has explained that some times government departments have no budgetary allocations and- in obtaining various approval the budgetary provisions are lapsed with the result that for want of budgetary allocation they are not able to pay the balance amount. In order to maintain cordial relations in the interest of business and in order to save the government departments as well as the assessee from embarrassment the outstanding balance amount has to be written off as a business expediency. He has given details of such expenses to us. In some cases the outstanding balance are very meager and we are persuaded to agree with the submission of Mr. Asti Kasbati that it is not advisable to institute legal process for recovery of such petty amount. Looking to all the facts and circumstances we are of the opinion that the assessee has rightly written off the bad debts and, therefore, the respective claims in the two assessment years under consideration are directed to be allowed."

4. Mr. Jawed Farooqui, learned counsel appeared on behalf of the department and supported the order passed by the DCIT and CIT(A) and submitted that the order passed by the learned ITAT is against the provisions of section 24(i) of the repealed Ordinance, as according to the learned counsel the ITAT was not justified in treating the cash awards as part of the salary and not a perquisite. As per the learned counsel it is clearly mentioned in the said section that any expenditure incurred by an assessee on the provision of perquisites, allowances or other benefits to its employee in excess of 50% of his salary excluding perquisite allowance or other benefits is not admissible. He in this regard also read out the relevant provisions of the repealed Ordinance. He vehemently contended that the said cash awards were not paid in accordance with the terms of employment and hence were not allowable under the provisions of section 24(i) of the Ordinance. So far as the issue of repair and renovation is concerned, he submitted that the same was capital in nature as according to him the auditors also had capitalized the same in the statement of accounts. He, therefore, submitted that the said amount is liable to he' treated as a capital expenditure rather than a revenue expenditure. He submitted that the depreciation on the said amount, as applicable under the Third Schedule of the repealed Ordnance, will be allowed on the said amount but straight away deducting this huge amount from the profit and loss account as revenue expenditure was not justified. He, therefore, submitted that the order passed by the learned ITAT maybe disapproved on this aspect also as the ITAT has incorrectly treated a capital expenditure as revenue expenditure. While making his submission on the claim of bad debts he submitted that the said amount was disallowed as no positive steps for recovery of the said amount had been initiated by the assessee and the claim appears to be premature. He submitted that the orders passed by the DCIT were well speaking orders wherein he had categorically observed that cogent material for substantiating the claims were not furnished by the assessee, hence the DCIT was quite justified in making the additions. In the end he prayed that the order passed by the learned ITAT may be disapproved by answering the questions, raised in negative i.e. in favour of the department and against the assessee/respondent.

5. Mr. Iqbal Haider, learned counsel for the respondent, on the other hand appeared on behalf of the respondent and supported the order passed by the learned ITAT and submitted that the cash awards given to the employee were based on the individual performances of the employees being awarded by the management. He submitted that this was an exclusive decision of the management in order to boost the individual performances of the employees to give them cash awards and could not be termed as perquisite. He further submitted that these awards were not paid as per the terms of the employment and therefore could neither be termed as salary nor could be added in the income as perquisite. He submitted that the DCIT had wrongly treated these cash awards as perquisites without any legal justification which was affirmed by the CIT(A) without appreciating relevant law in this regard. He further submitted that the said amounts paid were given as incentive in the normal performance of duties and was an exclusive management's decision, which has got nothing to do with the terms of the employment, hence was wrongly treated as perquisite to the employees. He submitted that the very assumption of the department that the said amounts had been paid as part of the salary and were in terms of the employment was not only incorrect but wrong application of the law. He, therefore, submitted that cash awards could be considered as a part of the salary but in no way could be considered as perquisite as defined under the said section.

6. The learned counsel further submitted that the bad debts claimed were due to the reason that as the assessee was mainly dealing with government functionaries and some amounts remained outstanding against those departments, which could not be recovered due to certain reasons. He submitted that though in some cases the amounts were big but mostly the amounts were quite meager, hence, the company considered not to spend its good money over the bad money to recover those petty amounts and wrote off the same. He submitted that all the amounts had a direct nexus with the business and thus were rightly written off by the company. He, therefore, supported the order of the learned ITAT and stated that the amounts were rightly allowed by the learned ITAT as irrecoverable amount of the company. So far as the issue of repair and maintenance is concerned he submitted that similar disallowances were made by the department in the previous years which were allowed in appeal by the learned ITAT and he had no knowledge whether any reference application against the said allowance was preferred by the department before this Court or not. He further submitted that the said expenditures incurred by the assessee fall under the definition of repair and renovation which fall squarely under the head repair expenses which were allowable under the provisions of section 23 of the repealed Ordinance and may be allowed. He, therefore, submitted that the learned ITAT has passed the order after going through the entire facts and no illegality has been pointed by the learned counsel of the Department in the order passed by the learned ITAT hence the order may be affirmed in this regard. In support of his contention the learned counsel has relied upon the following decisions:--

(1)? Girdhari Dass and Sons v. Commissioner of Income Tax (1976) (105 ITR 339).

(2)? Commissioner of Income Tax, East Pakistan, Dacca v. Gulistan Cinema Company, Dacca (1968) 17 Taxation 209).

(3)? Unreported judgment of the ITAT in ITA No.39/HQB of 1989-90.

(4)? 1966 PTD (T) 80.

(5)? Sui Southern Gas Company Ltd. v. Commissioner of Income Tax (2000 PTD 3741)

(6)? Commissioner of Income Tax v. Messrs 'Excide Batteries of Pakistan Ltd. (1978 PTD 191)

7. We have heard both the learned counsel at some length and have perused the record and the decisions relied upon. Before proceeding any further it would be advantageous if the relevant law is first discussed.

Section 16. Salary. --

(1) The following incomes shall be chargeable under the head "Salary", namely:

(a)? any salary due to the assessee from an employer in the income year, whether paid or not; and

(b)? any salary (including arrears or advances of salary) paid to the assessee in the income year by an employer.

Provided that where any salary is included in the total income on the basis that it has become due to an assessee, it shall not be included again on the basis that it is paid

(2) For the purposes of subsection (1), -

(a) "Hi/au" includes

(i)???????? any wages;

(ii)??????? any annuity, pension or gratuity;

(iii)?????? any fees, commissions, allowances, perquisites or profits in lieu of or in addition to, salary or wages;

(b) 'perquisite" includes-

(i)???????? the value of rent-free accommodation;

(ii)??????? the value of any concession in the matter of rent respecting any accommodation;

(iii)?????? any sum payable by the employer, whether directly or indirectly, to effect an insurance on the life of, or to effect a contract for any annuity for the benefit of the assessee, or his spouse or any dependent child;

(iv)?????? the value of any benefit provided free of cost or at a concessional rate;

(v)??????? any sum paid by an employer in respect of any obligation of an employee;

(c) "profits in lieu of salary" includes-

(i)???????? the amount of any compensation due to, or received by, an assessee from his employer at, or in connection with, the termination of or the modification of any terms or conditions relating to, his employment;

(ii)??????? any payment due to, or received by, an assessee from a provident or other fund to the extent to which it does not consist of contributions by the assessee and the interest on such contributions;

(d) "employer" includes a former employer; and

(e) "employee ", in relation to a company, includes a managing director or any other director or other individual, who, irrespective of his designation, performs any duties or functions in connection with the management of the affairs of the company.

Section 24(i)

Any expenditure incurred by an assessee on the provision of perquisites, allowances or other benefits to any employee, in excess of fifty percent of his salary excluding perquisites, allowances or other benefits.

8. We will deal with the issue of excess perquisite first. A plain reading of section 16 of the repealed Ordinance clearly reveals that the term salary includes a number of payments which are to be considered as part of the salary. It is seen from the record that the said cash awards were given on the basis of individual performance and was not in accordance with the terms of employment. It is also seen that it was the exclusive decision of the management to grant the said cash awards on the basis of the performance in order to improve the individual performance of the employees. In the definition clause the salary has been defined to include certain payments which means that the definition is an exclusive definition and the same could not be given either a narrow or a pedantic literal construction. Wherever the term 'include' is used the intention of the legislature was to give it a widest possible meaning. Though the 'term 'cash award' has not been included in the salary but in our considered view as the definition of the term 'salary' is very wide, hence, the cash award would also fall under the said definition. It is also seen that the learned counsel appearing on behalf of the assessee before the ITAT has candidly conceded that the said cash award can be considered to be salary as defined in section 16(2)(a)(iii) of the repealed Ordinance. We have also seen that where the term 'perquisite' has been defined in the said section the term 'cash award' does not fit in the said definition of the 'perquisite' given in the Ordinance as the said amount admittedly has not been given as per the term of employment therefore, could not be considered to be a perquisite' to an employee and in our opinion would fall under section 16(2)(a)(iii) as part of the salary and not as part of the perquisite. Had the amount been given as per the terms of the employment the position would have been different but as this amount has been paid as incentive to the employee, which was the exclusive decision of the management the same could not be considered to be a perquisite to an employee. We have also seen from the record that when the DR appearing before the ITAT was asked that whether the said amount could be considered to be a perquisite she conceded that the said amount does not fall under the definition of the perquisite. We are, therefore, of the view that the ITAT was fully justified in treating this amount as salary and not as perquisite to an employee. We, therefore, affirm the order of the learned ITAT and answer the question No.1 raised in the present Appeals in affirmative i.e. in favour of the respondent and against the applicant.

9. So far as the issue of expenditure incurred on repairs is concerned which were treated as capital expenditure, we find that no justification was given by the DCIT while disallowing the amounts as revenue expenditure and treating the same as capital expenditure. The only reason given in this regard was that the amounts were enduring in nature. No reason whatsoever has been attributed as to how the DCIT has come to the said conclusion that the amounts fall under the head capital expenditure. The orders passed by the CIT(A) also appears to be quite sketchy, who without examining the claim have affirmed the orders of the DCIT without proper application of mind. It is seen that the learned ITAT, however, had allowed the claims by specifically observing that similar expenditures were made in the previous years which were deleted by the ITAT. The learned counsel appearing for the department has not produced before us any material to substantiate that whether any reference in this regard has been filed by the department in the previous years or not. The learned counsel for the department also could not controvert the fact that what was the material before the DCIT to come to the conclusion that the said, amounts were capital in nature.

10. We have also considered the decisions relied upon by the learned counsel for the respondent and have come to the conclusion that if any expenditure is incurred on renovation and alteration by which no capital asset is acquired the said expenditure usually falls under the head of current repair which is a capital expenditure. In the present cases also nothing has been said on behalf of the department that the expenditures incurred by the assessee had resulted in creation of any capital asset but the nature of the expenditures appear to be that of current repair only. We, therefore, do not find any legal infirmity in the order passed by the learned ITAT and uphold the same by answering the question No.2 raised in this regard in affirmative i.e. in favour of the assessee/ respondent and against the department/appellant.

11. Now coming, to the last question of bad debts, it is seen from the records that the main reason for making the disallowance is that no concrete efforts to recover the amount including the Court litigation were produced by the assessee which had been confirmed by the CIT(A). The record shows that complete write up with supporting evidences had been produced by the A.R. which had duly been acknowledged by the DCIT but has disallowed the claims only for the reason that no concrete efforts for recovery had been made. It is seen that the respondent was engaged in supplying office equipments on sale and rent basis and some time due to certain reasons the said amounts were not paid and cleared by the government departments. The details of these amounts have duly been furnished to the DCIT which appears to have been totally, ignored by him. Detailed order in this regard has been passed by the learned ITAT which has not been controverted by the learned A.R. representing the department. It is not brought to our knowledge that the amounts written off, complete details of which were given to the DCIT, were not based on proper grounds. Section 23(x) of the repealed Ordinance specifically states that only those amounts are allowable as bad debts which are determined by the DCIT to be irrecoverable. In the present cases the order of the DCIT appears to be totally blank so far this application, of law is concerned, as no effort appears to have been made by the DCIT to work out the bad debts which in his opinion appear to be irrecoverable rather the orders of the DCIT appear to have been passed in a slip shod manner without working out the irrecoverable bad debts as specifically mentioned in the said section. Thus in our view the orders in this regard appear to have been passed in a cursory manner without fulfilling the legal requirements and the learned ITAT was fully justified in holding that the assessee has rightly written off the bad debts claimed by them. We, therefore, in the light of the above facts and circumstances are of the opinion that no illegality has been committed by the learned ITAT in allowing the said claims to the assessee. The order passed by the learned ITAT in this regard is hereby affirmed with the result that the third question raised by the department on this issue is also answered in affirmative i.e. in favour of the assessee and against the department.

12. Above are the reasons for our short order dated 19-5-2011 by which we have answered all the three questions raised by the applicant in affirmative in favour of the respondent and had dismissed these Income Tax Appeals.

S.A.K./C-6/K????????????????????????????????????????????????????????????????????????? Answer in affirmative.